1. In a free market economy, serves as a vital signaling device, directing resources to their most highly valued uses. D. profit

Transcription

1 ECON 1100 Global Economics (Section 05) Exam #3 Summer 2011 (Version A) Answer Key 1. In a free market economy, serves as a vital signaling device, directing resources to their most highly valued uses. D. profit 2. The Incidence of a Tax refers to B. who bears the burden of the tax in terms of decreased welfare. 3. Government failure can arise because, once created government agencies often take on a life of their own, with employees in the agency having an incentive to expand the scope of the agency in order to increase their own job security. This potential source of government failure is referred to as. B. Agency Inertia 4. A widget is a good that is both non-excludable and non-rival in consumption. Thus, we should expect that if widgets were traded in a free market, then D. More than one (perhaps all) of the above answers is correct. 5. In the United States, the highest Marginal Tax Rate currently imposed under the federal income tax is C. 35%, a highest Marginal Tax Rate which is lower than the highest Marginal Tax Rate of 39.6% which was in place in 2000 but higher than the highest Marginal Tax Rate of 31% which was in place in is someone who organizes and manages a business, typically with considerable initiative and exposure to risk. B. An Entrepreneur 7. Government Spending as a Percentage of GDP in the United States is projected to B. be between 41% and 44% in each year from now until Suppose that pizza production requires the use of medium skilled labor. If the price of this input increases then in the graph above C. Supply will shift to the left. 9. Suppose pizza is a normal good. If average household income in this market were to increase between 2011 and 2012 (with all other factors fixed), then in 2012 we should expect the price of a pizza to be and pizzas to be traded. A. above $12.00; more than 2,450.

2 10. Consider a good for which there is a positive externality. If this good were provided by the market, then B. less than the efficient amount of the good would be traded. 11. The efficient quantity of production of this good is units. B. 4, To maximize profit, this monopolist would B. sell 2,500 units of output, each at a price of $ When this monopolist chooses the price and quantity which maximizes profit, there is a resulting Deadweight-Loss equal to B. areas (e)+(h). 14. Harry contends that in a wealthy society like the U.S., all people should be guaranteed a minimum standard of living, in part by having free access to basic necessities such as prescription drugs and high speed Internet access. This argument is based upon the justification for redistribution. C. Social Contract 15. On July 2, 2011, current Heavyweight Champion Wladimir Klitschko (a.k.a., Dr. Steelhammer) defeated David Haye (a.k.a., The Hayemaker) by a unanimous decision in a fight at Imtech Arena in Hamburg, Germany. In the U.S. this fight was shown on HBO. The TV broadcast on HBO was excludable but non-rival in consumption, and was therefore a C. Collective Good. 16. Focusing on the Average Tax Rate of the Bottom 50% of Income Earners, this figure between 1980 and 2000 and then between 2000 and B. decreased from 6.10% down to 4.60%; decreased further from 4.60% down to 3.01% 17. The Average Costs of producing a level of output are simply Total Costs divided by level of output. Consider a firm for which it costs $40,000 to produce 4,000 units of output, it costs $45,000 to produce 5,000 units of output, and it costs $48,000 to produce 6,000 units of output. Based upon these figures, C. this production process appears to exhibit Economies of Scale. 18. refers to unselfish concern for the welfare of others. C. Altruism 19. Which economic function of government refers to the government production of goods or regulation of business, in order to get the ideal mix of products produced (i.e., with each good produced in the ideal quantity and at the ideal quality)? D. The Allocation Function of Government.

3 20. Based upon this graph, it appears as if B. production/consumption of this good generates a negative externality. 21. The efficient quantity of production/consumption of this good is units. D. 15, If the government were to entirely ban the production/consumption of this good, then there would be a Deadweight-Loss equal to A. areas (a)+(b)+(c). 23. The reintroduction of the gray wolf into the wilderness of the Western United States during the last several decades B. provides an example of how something akin to the Coasian Solution to the problem of externalities could be implemented in practice. 24. In 2010, Ty earned income of $52,000 while Sue earned income of $31,980. Which of the following could possibly explain this difference in income? D. Both (A) and (B) could possibly explain the difference in income between these two workers. 25. was a central figure in the formulation of the ideas of Utilitarianism, which argues that society should strive for the greatest happiness for the greatest number of people. D. Jeremy Bentham 26. Amy earns $125,000 per year. At her current level of income, Amy s Average Tax Rate is. C. 1.8% 27. Based upon the description given above, this tax appears to A. be a Regressive Tax. 28. A good is Non-Excludable if A. it is difficult (or very costly) to prevent consumption by those who do not pay for the good. 29. In 2010, Walker earned $250,000 of income, Sidney earned $600,000 of income and Robinette earned $900,000 of income. During this year, Walker paid 14% of his income in taxes and Robinette paid 19% of his income in taxes. Supposing that income provides a measure of economic capacity and average tax rate provides a measure of tax burden, in order for the notion of vertical equity to be satisfied Sidney must pay of his income in taxes. B. more than 14% but less than 19%

4 30. Pork Barrel Projects refer to D. public expenditures that give a relatively small benefit to citizens of a particular legislative district, while spreading much larger costs over the entire population. 31. Between 1968 to 2008, government expenditure as a percentage of GDP in the U.S. took on a mean value of 33.98% and a median value of 34.69%. In contrast, between 1792 and 1861, government expenditure as a percentage of GDP in the U.S. took on a mean value of and a median value of. A. 2.06%; 1.92%. 32. Provision of state funded Pre-Kindergarten by the state of Georgia is an example of D. redistribution in-kind. 33. Consider the market for Runner Peanuts. Between 2007 and 2011: equilibrium quantity decreased from 5,265 tons to 4,920 tons, and equilibrium price increased from $ per ton to $ per ton. This observed change would result from D. a decrease in Supply. 34. Imposing a per unit tax of $1.50 on sellers in this market would generate tax revenue for the government of B. more than $15,000 but less than $22, In comparison to the free market outcome, imposing a per unit tax of $4.10 on buyers in this market would generate a Deadweight-Loss that is B. exactly equal to areas (a)+(b). 36. Consider the following two proposed taxes: Tax A is a $1 per unit tax imposed on buyers; Tax B is a $2 per unit tax imposed on sellers. We can infer that D. More than one (perhaps all) of the above answers is correct. 37. Sylvester owns a business which removes stars from star-bellied Sneetches. He currently charges $50 per procedure, at which price consumers are willing and able to purchase 1,000 units per month from him. If he were to increase his price to $60, then consumers would be willing and able to purchase 800 units per month from him. Based upon this information it appears as if B. Sylvester has some market power. 38. Under the current U.S. Federal Income Tax, the Top 5% of wage earners earn approximately 35.75% of all adjusted gross income earned by everyone in society and pay B. about 59.67% of all taxes collected.

5 39. Pyeongchang, South Korea was recently chosen as the host city for the 2018 Winter Olympics, beating out two other finalists (Munich, Germany and Annecy, France). The Total Economic Surplus to be generated by the 2018 Winter Olympics does not depend significantly on where the games will be held. However, during the last several years, the governments of these three countries each used a tremendous amount of resources in order to increase the likelihood that their own country would be awarded the games (approximate spending on bid preparation was $31 million by South Korea, $42 million by Germany, and $21 million by France). In relation to the concepts discussed in lecture, these actions by these three governments appear to provide a good example of C. Rent-Seeking Behavior. 40. Regarding the notions of fairness of taxation discussed in lecture, the idea of D. vertical equity suggests that individuals with greater economic capacity should not have smaller tax burdens.